Why did my credit score drop after paying off debt? (2024)

Why did my credit score drop after paying off debt? (1)

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

The most likely possible reasons for your credit score dropping after paying off debt are a decrease in the average age of your accounts, a change in the types of credit you have or an increase in your credit utilization.

Paying off debt is generally a good idea, and it feels satisfying, so you may be surprised to find that your credit score dropped after you made a payment. The drop could have occurred for multiple reasons as credit scores are calculated using a variety of factors. People often see their credit scores drop after paying off debt due to a change in the types of credit they have, an increase in their overall utilization or a decrease in the average age of their accounts.

It’s important to keep in mind that credit score drops from paying off debt are typically temporary. In general, the benefits of paying off debt outweigh the downsides of a reduced credit score. If your debt has a high interest rate, the amount you owe will continue to grow over time, so reducing the balance or paying it off entirely could save you a significant amount of money.

Still, you can make strong financial decisions by understanding why paying off debt can reduce your credit score in the short term—and you can work toward better credit over time.

Read on to learn why your credit score dropped after paying off debt, other reasons your credit may have taken a hit and a few ideas for improving your credit.

Table of contents:

  • What factors determine your credit score?
  • Why does paying off a loan hurt credit?
  • Additional reasons your credit score might drop after repaying debt
  • Does paying off debt ever help your credit?

What factors determine your credit score?

Before we dive into why your credit score may have dropped after paying off debt, it’s important to understand the factors that impact your credit score. According to FICO®, your credit score is calculated based on the following factors:

  • Payment history (35 percent): Your track record of paying past balances on time has the most influence on your credit score. Making payments late may indicate to the lender that you’re a higher-risk borrower.
  • Amounts owed (30 percent): In general, lenders want to see that you’re using less than 30 percent of your available credit, as this signals that you can manage your finances without leaning too heavily on credit. You may also see this factor referred to as your credit utilization.
  • Length of credit history (15 percent): This refers to how long you’ve had credit. A longer credit history will positively affect your credit.
  • New credit (10 percent): Opening multiple new accounts in a short period can indicate risky borrowing.
  • Credit mix (10 percent): Consider opening a mix of credit card and retail accounts, installment loans and mortgages, although it isn’t necessary to have one of each.

Paying off debt could affect one or more of these factors, which could explain the drop in your score.

Why does paying off a loan hurt credit?

Below are a few potential reasons why your credit score may have dropped after paying off a car loan, credit account or mortgage.

Why did my credit score drop after paying off debt? (2)

Your average credit age may have declined

If you pay off your oldest account and close it, the average age of your accounts will drop, which could lead to a decrease in your score.

While closed accounts will stay on your credit report for seven to 10 years after you close them, they are viewed differently than open accounts.

Over time, your length of credit history and average account age will increase, so the drop that comes from paying off debt is likely temporary.

Your credit mix might be less diverse

In general, the credit bureaus who report your credit history want to see that you’re responsibly using several different types of credit.

Say, for example, that your credit report lists a couple of credit cards and a car loan. If you repay the car loan and close the account, your credit mix now has reduced variety since it only contains credit cards. This could cause your credit score to temporarily drop.

With that being said, it’s not beneficial to go out of your way to open as many different credit types as possible. Instead, use different types of credit when you need them, making sure to pay on time. Over time, your credit score should recover with responsible use of credit.

Your credit utilization may have risen

As mentioned above, credit utilization is one of the most influential factors that makes up your credit score. For example, if your only account is a credit card with a $2,000 limit and you have a balance of $500, you’re using 25 percent of your available credit.

If you pay off a credit card debt and close the account, the total amount of credit available to you will decrease. Consequently, your overall credit utilization may rise, leading your credit to take a hit.

It’s often helpful not to close credit card accounts, even if they’re not in use—unless they involve an annual fee or there’s another good reason to close them.

Additional reasons your credit score might drop after repaying debt

Although the most common reasons for a score drop after paying off debt are listed above, there are a few other possibilities.

Why did my credit score drop after paying off debt? (3)

Here are some things to keep in mind if you notice a change in your score after paying off debt:

  • You paid off an older collection account: In some cases, making payments on an old collection account can lead to the collection agency changing the date of the debt. Since the debt resurfaces as a newer account on your credit report, it may have a larger impact on your credit.
  • Enough time hasn’t passed since you paid off the debt: The credit bureaus may not receive the update about your payment for a month or more, so make sure to check your credit report to see whether the account is noted as paid.
  • Your score drop is unrelated to paying off debt: Although your credit score may drop after paying off debt, that may not be the reason your score dropped. Credit scores are a complicated calculation, and there could be many other reasons for a change in your score. For example, you may have applied for a new line of credit, have a missed payment on a different account or have inaccurate information on your credit report.

Does paying off debt ever help your credit?

Yes, paying off a loan can improve your credit in the long run. These payments go into your credit history and show that you’re a responsible borrower. As you continue to pay on the debt, your credit score may gradually improve, so by the time you pay it off, you’re often still at a higher credit score overall after the temporary decrease.

How to improve your credit score after debt repayment

If your credit score dropped after paying off debt, here are some steps you can take to bring your score back up:

  • Pay your bills on time: Since payment history is the most significant factor that influences your credit, it’s important to continue making your payments on time.
  • Keep credit accounts open: Even if an older account is no longer in use, consider keeping it open to extend the age of your credit.
  • Decrease your credit utilization ratio: Asking your credit card company for a credit limit increase and incurring less debt are two ways to lower your credit utilization ratio.
  • Limit applying for multiple new accounts: The hard inquiry that comes with applying for a new account can knock your credit down, and these can add up if you apply for multiple in a relatively short period.

Additionally, if you notice a credit score drop, you’ll want to make sure to get a copy of your credit report. After looking at your report for each of the three credit bureaus—TransUnion®, Experian® and Equifax®—you’ll have a better idea of the information they’re reporting about you and how it’s affecting your score.

In addition to seeing whether your debt is shown as paid off, you’ll also want to pay close attention to any negative items or inaccurate information listed on your credit report. Unfair negative items can hurt your credit, and federal law allows you to dispute any items on your credit report that are unfair or inaccurate.

Challenging false information is an important part of the process of repairing your credit. For help looking over your report and disputing inaccurate information, consider working with the credit repair team at Lexington Law Firm, who can assist with every step of the process. Having an accurate and fair credit report is an important first step in working toward your credit goals.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Why did my credit score drop after paying off debt? (2024)

FAQs

Why did my credit score drop after paying off debt? ›

It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.

Why does my credit score go down after paying off debt? ›

It could raise your credit utilization

Credit utilization — the portion of your credit limits that you are currently using — is a significant factor in credit scores. It is one reason your credit score could drop a little after you pay off debt, particularly if you close the account.

How long does it take to rebuild credit after paying off debt? ›

It can take weeks or even days for you to notice a change in your credit score. If you have recently paid off a debt, wait for at least 30 to 45 days to see your credit score go up. Will it be beneficial for my credit score if I pay off a debt? Your payment history will not be removed after you pay off a debt.

How much will credit score increase after paying off debt? ›

If you're close to maxing out your credit cards, your credit score could jump 10 points or more when you pay off credit card balances completely. If you haven't used most of your available credit, you might only gain a few points when you pay off credit card debt. Yes, even if you pay off the cards entirely.

Why did my credit score drop 100 points after paying off a car? ›

If you pay off your only active installment loan, it is considered a closed credit account. Having no active installment loans or having only active installment loans with relatively little amounts paid off on those loans can result in a score drop.

Why did my credit card limit decrease after I paid it off? ›

Even if you've been a perfect customer with the issuer in question, that issuer might still lower your credit limit based on your payment behavior with other credit lenders. The issuer is reducing credit risk. Sometimes a credit cut has nothing to do with you.

How to raise your credit score 200 points in 30 days? ›

How to Raise Your Credit Score by 200 Points
  1. Get More Credit Accounts.
  2. Pay Down High Credit Card Balances.
  3. Always Make On-Time Payments.
  4. Keep the Accounts that You Already Have.
  5. Dispute Incorrect Items on Your Credit Report.

Will debt settlement ruin my credit? ›

Debt settlement typically has a negative impact on your credit score. The exact impact depends on factors like the current condition of your credit, the reporting practices of your creditors, the size of the debts being settled, and whether your other debts are in good standing.

Does debt forgiveness hurt your credit? ›

Downsides of debt forgiveness

Debt forgiveness may negatively affect credit scores, making it challenging to obtain future loans or credit. Forgiven debt of more than $600 may be considered taxable income, potentially resulting in a hefty tax bill.

What happens if I pay off all my debt at once? ›

Paying your entire debt by the due date spares you from interest charges on your balance. Paying off your credit card debt in full also helps keep a lower credit utilization ratio, which measures the amount of your available revolving credit you're using.

What happens after I pay off a collection? ›

Collection accounts may affect your credit scores and may stay on your credit reports for up to seven years. Paying off collection accounts can have a lot of benefits, including potentially improving some of your credit scores.

Should I pay off a 5 year old collection? ›

Paying off the debt won't necessarily remove it from your credit history, but could improve your score over time. If you are currently trying to get approved for a mortgage or other loan, paying off old debts can improve your odds of approval.

Should I pay off my credit card in full or leave a small balance? ›

It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.

Why does my credit score go down when I pay off debt? ›

It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.

Why did my credit score go from 524 to 0? ›

Credit scores can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts (which may shorten your length of credit history overall), or applying for new credit accounts.

Why is my credit score going down if I pay everything on time? ›

Using more of your credit card balance than usual — even if you pay on time — can reduce your score until a new, lower balance is reported the following month. Closed accounts and lower credit limits can also result in lower scores even if your payment behavior has not changed.

Why is my credit score going down when I have no debt? ›

Things like new credit applications and missed payments may impact your credit score. You may be able to improve your credit score in a number of ways, including making sure you're on the electoral register, managing accounts well and limiting new credit applications.

Does paying off collections improve credit score? ›

For some credit scoring models, paying off collection accounts may improve credit scores. FICO® Score 9, FICO Score 10, VantageScore® 3.0 and VantageScore 4.0 credit scoring models penalize unpaid collection accounts. Paying off collection accounts may help improve these scores.

How long does it take to improve credit score 100 points? ›

In fact, some consumers may even see their credit scores rise as much as 100 points in 30 days. Steps you can take to raise your credit score quickly include: Lower your credit utilization rate. Ask for late payment forgiveness.

How to get 800 credit score? ›

Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.

Top Articles
Latest Posts
Article information

Author: Mrs. Angelic Larkin

Last Updated:

Views: 5704

Rating: 4.7 / 5 (47 voted)

Reviews: 86% of readers found this page helpful

Author information

Name: Mrs. Angelic Larkin

Birthday: 1992-06-28

Address: Apt. 413 8275 Mueller Overpass, South Magnolia, IA 99527-6023

Phone: +6824704719725

Job: District Real-Estate Facilitator

Hobby: Letterboxing, Vacation, Poi, Homebrewing, Mountain biking, Slacklining, Cabaret

Introduction: My name is Mrs. Angelic Larkin, I am a cute, charming, funny, determined, inexpensive, joyous, cheerful person who loves writing and wants to share my knowledge and understanding with you.